Expert Q&A: Fitting your credit card into your long-term financial goals

By Emma Lunn

Credit cards are generally seen as a short-term borrowing tool -- a way to get that new television now and pay it off over the course of a month. But how do they fit into your bigger financial picture?

We spoke with Martin Bamford, a personal finance author and a financial adviser at Informed Choice  -- and asked him how he would advise clients when it comes to developing a healthy long-term relationship with credit. What kind of advice do you give your clients about credit?

Bamford: Credit has to be treated with caution and discipline. With big credit limits, it is far too easy to get carried away with credit card spending and then be hit with punitive interest charges. We tell our clients to consider their credit cards within their overall budget, prioritising the repayment of short-term unsecured debt, as this is usually the most expensive.

Martin Bamford
Chartered Financial Planner and CFP,
Informed Choice Ltd. Is it possible to live within your means while using credit cards?

Bamford: This is absolutely possible, but it does require some discipline. People often use credit cards for their purchases throughout the month and then pay off the debt in full at the end of each month, so they don't incur any interest charges. This helps them earn cash back or other rewards, and also provides a degree of protection for bigger ticket items. It's important to resist the temptation of seeing your credit cards as "extra" money that you can spend. What are some of the biggest mistakes you've seen people make when it comes to credit?

Bamford: The most damaging mistake people make is to spend on credit cards and then make the minimum repayments each month. The interest charges soon build up, and it can take decades to repay a credit card debt this way.

Another mistake to avoid is allowing your bank to increase your credit limit to unrealistic levels without proper consideration and agreement. In my early 20s, one of my credit card providers increased my credit limit to £14,000 which was equivalent to about half of my salary at the time. How do you personally use credit cards?

Bamford: Personally, I only use my credit cards for big-ticket items and when paying deposits for goods or services I will receive in the future. If I buy anything over £100, I will use my credit card to get Section 75 protection, should the company go bust or fail to deliver. [Section 75] makes the credit card provider equally liable if something goes wrong and is a valuable bit of consumer protection you get when shopping with a credit card. What are your tips for freeing up extra money to put into savings or pay down debt?

Bamford: In the current economic environment it is really tough to free up money for savings. The only way to do this is to create a budget and stick to it. It's far easier to spend money than it is to save it, so willpower is required if you are to avoid the sort of frivolous spending that will eat up your earnings.

By reviewing a typical three months of spending, it is usually easy to identify lots of things that you buy that you don't really need. Adopting a more frugal lifestyle can be a fun challenge and often more satisfying than simply buying what you want, when you want it. Have you any tips for resisting the temptation to use credit cards to spend money you don't have?

Bamford: This comes down to decisions you make about the quality of your life in the long term. If you have a family, you owe it to them to be financially responsible and not spend money you don't have.

The days of easy and cheap credit are long gone and unlikely to return. Building up debt to finance your desired lifestyle is taking a very short-term view of life, and until your mindset changes to create something for the future, it can be very difficult to escape the rollercoaster of consumerism that often causes us to accumulate debt.

See related: Credit card debt weighs heavily on pensioners, 5 tips for finding a financial planner you can trust

Published: 28 August 2012